Wall Street’s Facebook Status

Barry Ritholtz at The Big Picture has written a summary of the failed Facebook IPO that everyone should read in spite of the naughty word in the title. Wall Street’s Facebook status is ‘dysfunctional’ and the problems extend far beyond one bungled IPO.

The rot in our financial institutions is gumming up the engine of capitalism, but it’s unclear how much you can blame the bankers. The failure of anyone with power in Washington to face up to their key role in enabling this sad story proves that our “partisan divide” is mostly a marketing ploy.

The Reagan years brought the dawn of a new vision for the middle class. Rising personal wealth, expanding homeownership, and broad access to relatively transparent stock markets could change the character of middle class life. More ordinary people than ever before could transition from wage earning to capital ownership.

A generation of upper class tax cuts, sloppy (corrupt?) deregulation, and the securitization of the mortgage market has gutted those hopes. Adjusted for inflation, the Dow Jones Average is down more than 20% from its peak at 11,722 fourteen years ago and there is no relief coming for homeowners.

As Reagan once said, there are no easy answers, but there are simple answers. Those simple answers:

– Get depository banks and insurance companies out of investment banking. Make them choose between FDIC protection and the high-risk, high-reward world of speculation. If they want to bet their shirts on derivatives that’s fine, but they shouldn’t be allowed to hold the public hostage to their mistakes. Set them free to fail.

– Simplify and rebalance the tax code. End the radically preferential treatment of capital gains, cut tax rates for individuals and corporations, and phase out all tax expenditures. All of them.

– Repeal Dodd-Frank. It’s a boondoggle that buries the financial industry in paper while failing to rein in the riskiest practices. Sarbanes Oxley should be revisited and trimmed. The two Acts create massive compliance burdens without adding meaningful transparency.

– Roll back the provisions of the 2000 Commodities Futures Modernization Act that allowed banks, pension funds, insurance companies, and other federally regulated institutions to pour money into commodities derivatives. That market has fueled a decade long bubble and one catastrophic crash. It sucks capital away from businesses and into speculation, driving up the cost of the resources businesses need to operate while depleting available capital for new investment.

Which candidate in this election is offering to do these things? None. Republicans, who we count on to maintain a healthy business climate have effectively left the building. Any attempt to discuss these problems ends with bloodcurdling screams of “SOCIALISM!” They won’t settle down until they find the real birth certificate.

The left’s blanket suspicion of people who make money limits their interest or insight into these problems. In Obama’s first term the Democrats had a free hand to tackle the mortgage crisis and the collapse of Wall Street. Instead we got Obamacare and Dodd-Frank.

While we wait for a Wall Street status update Washington papers over the financial crisis with mountains of pointless regulation. There are simple answers, but they are not easy.